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ARR earnings call for the period ending December 31, 2018.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the ARMOUR Residential REIT, Incorporated fourth-quarter 2018 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded on Friday, February 15, 2019. I would now like to turn the conference over to the Chief Financial Officer Mr. Jim Mountain.

Please, go ahead.

Jim Mountain -- Chief Financial Officer

Thank you, Frank. And thank you all for joining our call today to discuss ARMOUR's fourth-quarter 2018 results. This morning, I'm joined, as usual, by ARMOUR's co-CEOs Scott Ulm and Jeff Zimmer, and by my colleague, Mark Gruber, our chief operating and chief investment officer. By now, everyone has access to ARMOUR's earnings release and Form 10-K, which can be found on ARMOUR's website, www.armourreit.com.

This conference call may contain statements that are not mere recitations of historical fact and, therefore, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protections provided by the Reform Act. Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the forward-looking statements due to the impact of many factors beyond the control of ARMOUR. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factors section of ARMOUR's periodic reports filed with the Securities and Exchange Commission.

Copies are available on the SEC's website at www.sec.gov. All forward-looking statements included in this conference call are made only as of today's date, and are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless required to do so by law. Also, our discussion today may include references to certain non-GAAP measures.

A reconciliation of these measures to the most comparable GAAP measures is included in our earnings release, which can be found on ARMOUR's website. An online replay of this conference call will be available on ARMOUR's website shortly and will continue for one year. ARMOUR's Q4 GAAP net loss was $212 million or $5.07 per common share. The net loss was driven by -- driven primarily by mark-to-market movements of our interest rate swaps and sales in our Agency MBS portfolio, which caused largely prior quarter mark-to-market valuation adjustments to move out of comprehensive income and flow through fourth-quarter P&L.

Core income, which excludes mark-to-market items and includes TBA Drop Income was $32.2 million or $0.64 per common share. For the last 10 straight quarters, our core earnings have exceeded dividends. Through December 31st that access totaled $33.5 million, which represents about $0.77 per common share outstanding at year end. Based on stockholders' equity at the beginning of Q4, core income represents an annualized return on equity of 10.6%.

ARMOUR's quarter-end portfolio consisted of over $7.1 billion of Agency Securities, another $900 million of Agency TBA positions, and approximately $800 million of credit risk and nonagency positions. Quarter-end book value was $20.86 per common share. That's down $2.63 for the quarter due primarily to continued rate increases and spread widening. Adjusted for dividends, that represents a total economic return of minus $2.06.

GAAP book value at February 13, 2019 was estimated to be approximately $21.39 per common share outstanding. Remember that we include recent book-value estimates in our update presentations available on our website or EDGAR. Usually they come out around the middle of the following month. We paid dividends of $0.19 per common share during each month in the fourth quarter, and for -- that totals $24.5 million or $0.57 per common share.

We've announced monthly common dividends for the first quarter of 2019, continuing the steady rate of $0.19 per share per month. We're also -- we were also active in the equity markets. We raised over $185 million since we last spoke to you. We issued approximately 9,125,000 common shares through our aftermarket offering program with securities dealers, directly to investors through investor waivers as part of our dividend reinvestment and stock purchase program, and in the underwritten block trade in January in 2019.

Now we have 51,486,573 shares of common stock outstanding. Now let me turn the call over to co-Chief Executive Officer Scott Ulm, so that he can discuss ARMOUR's portfolio position and our current strategy. Scott?

Scott Ulm -- Chief Executive Officer

Thanks, Jim. Good morning. The completion of third quarter of 2018 served as a calm before the storm precursor to the fourth quarter's volatility. By early fall, a looming trade war, a gridlocked congress, and down trending data out of Europe and China have gathered like dark clouds over economic projections for 2019 and 2020.

Suddenly the Fed's vision of a tighter monetary policy on autopilot collided with market's growing concerns over maturing economic cycle. Widening credit spreads and rising funding costs cut quickly into growth expectations, resulting in the worst quarterly plunge for the U.S. equity market since 2011. Yields on the 10-year treasury declined by 55 basis points from their highs of 3.24% down to 2.69% on December 31st.

The yield on the two-year note declined in step with longer tenders, ending the year at 2.49% or just nine basis points above Fed funds, implying almost no chance of further Fed hikes in the near term. Due to their superior liquidity and U.S. government backing, agency MBS served as a haven in the turbulent markets and outperformed credit by a wide margin. However, negative convexity and exposure to volatility meant that agency mortgage bonds couldn't keep up with the U.S.

Treasury and interest rate swap curves, resulting in wider mortgage spreads versus bulk. This was particularly pronounced in higher coupon MBS, where high risk of refinancings and shorter duration led to underperformance versus lower coupon cohorts. The CRT or Credit Risk Transfer market traded in sympathy with widening credit. Newer 2017 and 2018 vintages underperformed more seasoned M2 cohorts by as much as 30 basis points, supporting our negative view on weaker credits in newer issues.

As we noted last quarter, we view the new issue CRT market as nearly fully priced, but acknowledge that strong participation and support of housing markets will -- may provide tailwinds to valuations for a while. Last quarter, we modestly reduced our CRT exposure. In doing so, we were pleased to find the sector exhibited fine liquidity among the broker community. Despite their positive convexity in GOC guarantee, spreads on 10 -- 9.5% [Inaudible] pools have maintained higher correlation to high-grade credit markets and widened by nearly 20 basis points during the fourth quarter, their cheapest since early 2016.

This move presented a rare opportunity to add a positive convexity instrument to the portfolio at historically attractive levels, prompting us to increase the allocation of this asset class to 22% of our entire portfolio. The bias to higher coupons in our agency MBS portfolio was one of the main drivers for book-value underperformance. Spread widening in CRT, [Inaudible], and Ginnie 2 swaps added an additional drag on the performance, albeit to a lesser degree. You can view our December 31, 2018 portfolio in our 10-K, but after our recent capital raise, ARMOUR's positioning as of January 31, 2019 is as follows: we maintain a hedged book of paid fixed, received floating swaps of $8.8 billion no-show; our agency fixed rate repo position was covered 103.5% by swaps; our net duration was negative 0.28 basis points, an increase of negative 0.49 at the end of the year.

This number does not include any negative duration effects from our repurchased liabilities. Our spread DV01 at January 31st was $5.8 million. We anticipate that core earnings will cover our dividends during the first quarter of 2019. As of January 31st, our funded leverage ratio or debt-to-equity, was approximately 6.1 times.

Adding in the leverage effect of unfunded TBA dollar-roll positions and forward-settling transactions, results in an implied leverage of 8.2 times as of January 31st. While TBA dollar rolls are no longer trading at the levels specialists observed over the past few years, we continue to find pockets of opportunities where dollar-roll financing is more favorable than the general collateral repo market. The average prepayment rate on our agency assets decreased from 6.1 CPR in the third quarter to 4.7 CPR in the fourth quarter. Our January 2019 CPR was even lower at 3.9 CPR.

It is important to note that a good portion of our agency portfolio is composed of assets with prepayment protection through lower loan balances or contractual prepayment lockouts as in our DUS paper. Repo financing remains consistent and reasonably priced for our business model. ARMOUR is currently active with 23 repo counter parties, and in addition, has signed MRAs with another 25. Total repo financing was $7.9 billion at the end of January 2019.

Importantly, our affiliate BUCKLER Securities is financing approximately 49% of our entire repo position and 53% of our agency portfolio liabilities. Financing through BUCKLER provides us with greater control over our liabilities. Our investment in credit risk transfer securities was valued at $734 million at the end of January of 2019 and represented 89% of our credit risk and non-agency portfolio. In the CRT transactions, we take the credit risk of Fannie and Freddie underwriting in return for an uncapped floating-rate coupon.

The credit quality of our CRT bonds has continued to be reliable due in large part to strong GSE underwriting standards on the 2013 to 2016 vintages that we own. In addition, these securities benefit from increasing credit enhancement over time that can lead to credit rating upgrades. 59% of our CRT portfolio has been upgraded to investment grade. Rating upgrades result in better financing terms and possible price appreciation.

At the end of January, ARMOUR owned 71.8 million of non-agency legacy RMBS. Currently, we see very few opportunities for investment in this asset class. However, existing holdings from that period continued to perform well. Although, the jumbo and non-QM market issuances is, again, projected to double versus 2018, non-agency mortgage issuance remains very low on a historical scale, keeping spreads tight.

Given the tight valuations in the non-agency markets, we currently see better opportunities in agency collateral. As of February 13th, our estimated book value on a GAAP basis is up 2.5% since year end, driven by spread tightening. 2019 presents new uncertainties as robust economic growth at home and abroad is being questioned. Although valuations have regained some of their losses after a tough fourth quarter, we are encouraged by Fed Chairman Powell's doveish stance to maintain easy financial conditions to keep our economy on track.

The strong response from the Fed also bodes well for bond spreads and broad-market volatility, a tailwind for ARMOUR's portfolio. Our response has been to take advantage of recentwide spreads by deploying the newly issued capital, and increasing our leverage back from historical lows. While we like spread risk, we maintain a neutral to a slightly shorter stance on duration. Operator, that concludes our prepared remarks, and we will now take any questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Douglas Harter with Credit Suisse. Please proceed.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. Just following up on one of the last comments that you made about leverage, I guess, where do you see kind of leverage going to and what is kind of the right level in this current environment?

Jeff Zimmer -- Credit Suisse -- Analyst

Good morning, Doug. This is Jeff. So the APAC's in-spread widening was the day after Christmas. And since then, 30-year for us, for example, in, say, 30 years, 15 years are in 5 OAS.

Since that period of time [Inaudible] bonds, which were trading at 70 to 71 of swaps are now into the 60 to 61, so they've tightened quite a bit. However, at 8.2 times leverage should spreads widen a little bit, we have some dry powder. So I would not at this point our leverage to go down. If we see opportunities, it might go out a half a turn, and I think that range will be -- kind of quantifies here for the first quarter.

Douglas Harter -- Credit Suisse -- Analyst

Got it. And then, I guess, how -- just how are you thinking about that risk/reward of kind of if you see another spread widening taking up leverage, obviously, with that comes extra return, but with that potentially comes extra spread risk from being higher levered. So, how are you thinking about trying to protect yourself versus kind of another fourth quarter versus kind of the ability to generate extra return with that higher leverage?

Jeff Zimmer -- Credit Suisse -- Analyst

So, in the fourth quarter we were probably a full turn less leverage. So if we've been where we are right now, the book value performance would have been little bit worse. When spreads widen out to historical wide levels over in a multi-year period, it never leaves a very good time to invest. You cannot pick the wide APAC's point all the time, and we certainly didn't do that this time but that's a good place to invest if we're looking out for the next year.

So once again if we do see spreads widening and we think they're good investment opportunities, we'll up-leverage a little bit, but all these things change every single week. And if for some reason something happens with economic data that would show that the Fed is now maybe we're not going to be so dubbish then we have a different perspective than partially reduced leverage. We -- sometimes we let monthly prepayments just roll off and not reinvestment, and that's also a way that you can modestly reduce leverage. So I hope that answers your question.

Douglas Harter -- Credit Suisse -- Analyst

It does. Thank you.

Jeff Zimmer -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question comes from the line of Trevor Cranston with JMP Securities. Please proceed.

Trevor Cranston -- JMP Securities -- Analyst

Hi, thanks. A question on one of the last comments about the portfolio being somewhat negative duration at this point and you guys, obviously, being relatively comfortable with spread risk, how are you guys thinking about the risk to the portfolio of spreads and rates being correlated in the sense that if there's a spread widening event, it may be likely that rates drop and could sort of being negative duration along with having spread risk amplify the book value exposure in that scenario. I'm just curious how you guys are sort of thinking about that correlation risk?

Jeff Zimmer -- Credit Suisse -- Analyst

That's a good question. So we're modeled out as such, just looking at the curve evenly across the curve, the whole curve goes up or down 25 basis points, our model show our book value is very stable. OK. The risk that we have is the business that we're in and that's only mortgages.

So as I just told Doug, we love the leverage where we are right now and that's why we're there. We do own mortgages. We are in the mortgage investment business. If spreads do widen a little bit, we will potentially invest in more mortgages.

If we feel that the markets change and we're going to get a bull flatter here the 10-year and the fiber going to run a little bit, we'll either take off some hedges or maybe add a little bit more convexity. One of the reasons that we added so many [Inaudible] bonds after our capital raise is to address exactly what you're asking about because they're going to trade like corporate bonds in a rally. So we are better positioned for a move even though the duration is slightly negative than we have been in a number of quarters.

Trevor Cranston -- JMP Securities -- Analyst

Gotcha. OK. That makes sense. And then looking at the latest portfolio update it looks like you added both some spec pools and some TBAs.

How are you guys thinking about the trade-off between spec pools versus TBAs today? I know I've seen some commentary about risk in TBAs, given wider gross [Inaudible] spreads versus bond coupons. So, just curious how you're thinking about that allocation going forward.

Jeff Zimmer -- Credit Suisse -- Analyst

That research that you're reading is completely correct. Now the Fed-March rolls on a lot of the higher coupon, Ginnie, Fannie 4.5s, Ginnie 2.5s were actually really good, low-teens, 12, 13, even one we did some 14% kind of return stuff. The March-April and the March-May roles don't look as good. So as we go forward and address those role opportunities, we'll either take delivery and sell or most likely swap in with some specified pools.

There are very good opportunities still, double-digit opportunities in specified for us and some of the other Ginnie 2 products as well. So what happens on a month to month is the dollar rolls progress. Sometimes they look kind of crummy, 30 days out. All of a sudden you get 10 days in advance and they pop up because dealers have to start covering their short position.

So we take that a month at a time, but always looking simultaneously at the investment opportunities in taking collateral and a specified pool basis.

Trevor Cranston -- JMP Securities -- Analyst

Covered it. OK. I appreciate the comments. Thank you.

Jeff Zimmer -- Credit Suisse -- Analyst

All right. Thanks for calling in.

Operator

Our next question comes from the line of David Walrod with JonesTrading Canada. Please proceed.

David Walrod -- JonesTrading Canada -- Analyst

Good morning. You obviously raised capital in January and you put out your monthly update last night. When we look at the asset allocation, it looks like you put a lot of new capital to work in the agency space. Is that just temporary thing and you're going to look to allocate more to non-agencies or are you seeing the agency space more attractive today?

Jeff Zimmer -- Credit Suisse -- Analyst

Hey, David, good to hear from you. So as Scott alluded to and I think somewhat specifically we talked -- let's talk about CRTs first. The seasoned CRTs that we own, the 2014, '16 vintage is really high-quality vintage. The newer CRT so the non-agency space, we don't see the quality as good, and I discussed that in detail in the last quarter's conference call.

So we'd have to see a real nice widener in the current production CRTs for us to add, and that's the only non-agency area, where we're spending any time focusing at all. In terms of the specified, as I just told Trevor, we did a mix of investing [Inaudible], specified pools and some dollar rolls and we will take a look and see, if vintage paper looks good as we get into the next dollar roll or if we -i to knew the dollar roll product. [Inaudible] right now, however, are a little tight. I will tell you an area we will not invest in and that's the adjustable rate or hybrid securities.

We don't like that sector right now. We feel the pricing is opaque and the trading is very limited in it.

David Walrod -- JonesTrading Canada -- Analyst

OK. That's very helpful. And my other question is the dividend. You noted in your press release that your core earnings have exceeded dividend for 10 consecutive quarters.

How is the board thinking about the dividend today?

Jeff Zimmer -- Credit Suisse -- Analyst

As we said, and Scott said in his comments, we are going to -- core earnings are expected to equal or exceed the dividend for the first quarter. And as we look out to the future, we feel that our investment run rate is very sustainable. And I talked about that in two earnings calls about the sustainability of earnings is very important to our investor base. So we're going to try without doing anything like excessive leverage to maintain our dividend, and the board is comfortable with the way we're operating in that regard right now.

David Walrod -- JonesTrading Canada -- Analyst

OK. Thank you very much.

Jeff Zimmer -- Credit Suisse -- Analyst

Thanks, David. Good to hear from you.

Operator

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann & Company. Please proceed.

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

Hi. Given where your stock price is right now and given your positive comments in terms of the environment, what are your thoughts about additional equity raises?

Jeff Zimmer -- Credit Suisse -- Analyst

So equity raises are, as I want to say, at the pleasure of the board and the -- if opportunities and our stock prices are in a good spot, we will look to raise capital. It's something that we're doing this morning.

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

Great. That's my question. Thank you.

Operator

Mr. Mountain, there are no further questions at this time, please continue with your presentation or closing remarks.

Jim Mountain -- Chief Financial Officer

Well, Frank, thank you and thank you all for joining our call this morning. As always, if anybody has other questions, feel free to call us at the office, we try and either pick right up or get back to you as promptly as possible. We look forward to a constructive dialogue with everybody in the investor community, and we'll talk again soon.

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